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DoD Publishes New Rules to Fight Counterfeit Parts

On May 6, 2014, the U.S. Department of Defense (DoD) published final DFARS (Defense Federal Acquisition Regulations System) rules1 to eliminate counterfeit parts from the supply chain by shifting the burden of protection onto contractors. The regulation broadly defines “electronic parts” and eliminates allowable costs for replacing counterfeits with authentic components. The outcry from the industry has been predictably loud.

Basing the rule on their interpretation of the 2012 and 2013 National Defense Authorization Acts (NDAA), DoD leaves up to the supply chain how to eliminate counterfeits, and focuses more on penalties for contractors when counterfeits are found in the system. The responsibility falls entirely on the contractor to certify that deliveries are manufactured from 100 percent genuine components.

There are many expensive actions a company can undertake to help prevent counterfeit parts from entering its supply chain. Massive testing programs, inspection protocols that touch deep into that supply chain, even destruction of random samples add time-consuming layers to manufacturing, while providing only a veil of insurance, rather than value.

The easiest way to ensure genuine components is to purchase from an authorized distributor rather than an independent broker. Authorized distributors inventory components directly from the manufacturer, guaranteeing first-quality, new components.

Independent distributors are not tied to any single supplier. Their parts can come from other brokers, overstock, or even gray markets; providing quick service and, in some cases, the allure of inexpensive parts.

However, according to Lieutenant General Patrick O’Reilly, Director of the Missile Defense Agency, “… more than 60 percent of inspected independent distributors were assessed as moderate to high risk for providing counterfeit products.” MDA found that some, “… engaged in ‘deceptive marketing’ by posting photos of fake facilities on their websites to appear more established.”2 Investigators found that one independent distributor’s “facility” was a local UPS store.

When systems on P-8 Poseidon aircraft failed, U. S. Navy investigators found it was due to counterfeit parts that should never have been on the plane. The resulting Senate Armed Services Committee hearing led to the grilling of the Boeing program vice president on Capitol Hill and revealed, "… independent distributors whose operators were indicted in October 2009 for conspiracy, trafficking in counterfeit goods and mail fraud in connection with the importation of counterfeit electronic parts from China."2

In a case like this, the new DoD rules would require the manufacturer to replace the equipment impacted by counterfeits from their own pocket – a potentially catastrophic situation that can be avoided by dealing with an authorized distributor.

When an authorized distributor takes on a new line, due diligence is performed to confirm there is more to each company than their reputation and website. Stability and performance are evaluated. Quality, delivery, logistics, returns policies, warranties and even corporate cultures are investigated. And once that relationship begins, there is ongoing evaluation on both sides. These long-term business partnerships are predicated on each party delivering the best quality products to the end user, on-time, every time.

Many authorized distributors provide more than just first quality components, creating supply chain programs to manage the flow of components into production lines, and in the case of TTI, those programs can include bonded inventory on the floor at the manufacturer’s point of use, or just in time delivery of reserved stock, warehoused by TTI, released and replenished according to production requirements. These services can offset logistical advantages an independent broker might provide, and allow flexibility that purchasing directly from a manufacturer cannot.

Working from forecast driven, real world data, an authorized distributor can bring manufacturers peace of mind, timely production sourcing, and ultimately, supply chain integrity.

Kevin Sink

Kevin Sink, Vice President, Total Quality is responsible for the quality performance of TTI North America and the quality management system globally. Kevin is considered a leading authority on best practices in counterfeit risk mitigation.